The use of hydroelectric power is not only an important economic factor for Switzerland, but also an important source of income for the public purse. The cantons alone take in 280 million CHF a year in water-rates and taxes from this important energy source – an average of 4.6 per cent of their total tax income. In some alpine cantons, such as Uri, the Grisons and Valais, water-rates make up as much as 12 to 22 per cent of the tax income. With regard to the coming liberalisation of the electricity market, the Centre for Energy Policy and Economics (CEPE) (1) at ETH Zurich has put today’s system of taxes under the microscope. The team of scientists comes to the conclusion that a new system is needed that takes better account of economic principles.

"Sub-optimal solution"

At present all hydroelectric power plants are taxed at a single rate, that can vary from canton to canton. The Federal government only determines the limit for the maximum rate. "On average, the cost of water-rates to power plants is 1.1 cents for each kilowatt hour produced," explains Massimo Filippini, professor at CEPE and head of the study. "This makes water-rates an important cost factor for power plants." Filippini faults the present system, which does not sit well with a liberalised market, from an economical point of view.

Water does not have the same inherent value for all power plants, as the economist explains. Costs can vary widely, depending on a power plant’s locationk, the costs of construction and running costs. Conversely, not all power plants can sell their electricity to the market at the same price. "So the question is, how does one estimate the value of the resource, water, how much does one have to pay for it?"

Re-distribution on both sides

The authors of the study propose that power plants no longer be taxed according to their gross output but on their economic productivity. "Our system is based on the well-known theory of resource yield," explains Filippini. "This means that water-rates are adjusted to reflect the yield of the use of water resources after the deduction of expenditure. The question of the portion that can be then be skimmed off as excess profit is a normative one, and must be subject to a political decision."

Would like to make taxation of hydroelectric power more flexible: Massimo Filippini from the CEPE. large

Yield from hydroelectric power is of existential importance to the alpine cantons. The picture shows the dam in Solis (GR) (Picture: B. Etter / VAW Fotodienst) large

A system change of this order would lead to a strong re-distribution. "Highly profitable plants would have to pay higher water-rates; capital intensive, less profitable plants would be less burdened," says Filippini. As far as the various cantons and communities are concerned there would be winners and losers. "Whatever happens, a system change would have to include accompanying measures," concedes Filippini, "for example, via the cantonal equalisation settlements." The researcher is convinced that such a system would work well. "Norway already has a system of hydroelectric power taxation in place," he says.

Scepticism from power plant companies

The results of the study meet with little enthusiasm from the power plants that commisssioned it. The Interest Group "Wasserkraft" (IGW) welcomes the idea of making water-rates more flexible in principle, says Gianni Biasiutti, Director of the Power Plant Oberhasli. "But we doubt whether the proposed system is realisable." IGW could, however, envisage a simpler solution that more closely resembles the current system. "From our point of view, fiscal exoneration for costly renovations and expansions is of paramount importance," he adds. At the same time, IGW finds confirmation in the results of the study for its view that water-rates tend to be too high in Switzerland today.

Rejection from the alpine cantons

CEPE’s proposal meets with categorical rejection from the Conference of the Councillors of Alpine Cantons (RKGK). "The proposed method does not present a viable alternative to the current system of regulation," says Pankraz Freitag, Councillor of Canton Glarus and President of RKGK, decidedly. "Alone the lengths that CEPE had to go to collect the data for the study show that the system would not be practicable." Freitag also fears that a system change could lead to drawn-out litigation processes.

The cantons are clearly troubled by the idea that they would no longer be able to calculate and accurately budget their income from hydroelectric power if the selling price depended solely on market forces and developments. "Running a power plant is a long-term affair," says Freitag, "and a taxation system oriented to the short-term is not appropriate." He is, however, able to draw one positive conclusion from the study. "Numbers clearly show that Switzerland’s electricity providers are moderately taxed compared to other countries."

Restrained reaction from the Federal agencies

For the moment, the Federal government is calmly taking note of the controversy surrounding the issue. "The study provides a wealth of valuable information and data," says Christian Furrer, Director of the Federal Office for Water and Geology (BWG) (2). "But it would prove very difficult to introduce such a system." The maximum rate, set by government, is a politically defined value with a balancing function. "We try to take the interests of various parties into account. Until now such a procedure has proved sensible," considers Furrer, "and as long as no clear signal emerges from the cantonal authorities and the power plant operators that they are ready for a system change, there is no reason for us to act."